When Fee-Based Accounts Rip You Off
Commissions can make sense.
By Katy Marquardt, Staff Writer
From Kiplinger's Personal Finance magazine, August 2005
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Brokerage firms that charge an annual fee based on the assets in your account rather than collecting commissions on trades may have your best interests at heart. But such fee-based accounts can end up costing you more, and regulators have started cracking down on abuses.
Fee-based accounts, which typically charge about 1% of assets annually but levy no additional commissions for trades, are booming. At the end of 2004, investors had nearly $270 billion in fee-based brokerage accounts, up 61% from the end of 2002, according to Boston-based Cerulli Associates.
With fee-based accounts, your interests are, in theory, aligned with your broker's. As the value of your assets rise, so does his or her compensation. And there's no incentive for the broker to recommend or initiate a lot of trades to generate commissions.
The problem occurs when brokers recommend fee-based accounts to customers who trade infrequently. In April, NASD, the brokerage industry's self-regulatory body, fined Raymond James $750,000 for steering nearly 3,000 clients into fee-based accounts when they would have been better off paying commissions for each of their trades. These were buy-and-hold investors whose accounts had been dormant for at least one year, says NASD.
In one instance, in 2001, Raymond James switched a client with more than $420,000 in assets to a fee-based account after eight years of inactivity. After two years, the account had incurred $6,000 in fees, even though the client had not initiated a single trade. Had the money remained in a commission-based account, the customer probably would only have paid inactivity fees totaling less than $100.
Raymond James, based in St. Petersburg, Fla., and with offices in all 50 states, neither admitted nor denied guilt but agreed to repay $138,000 in fees. NASD says other firms are under investigation.
